1. Chapter 7 Basics of Business Taxation
EBD 301
Money Management for Entrepreneurial Ventures

2. Introduction IRS Publications – New Employers
IRS Publication 15 (Circular E), Employer’s Tax Guide (2014)
EINs, Defining Employees, Paying Payroll Taxes
Rules for Submitting Form 941 or 944 (when advised by IRS to do so)
IRS Publication 334 Tax Guide for Small Business
Obligations as an employer

3. Business or Hobby?
Hobbies are considered an activity not engaged in for profit.
IRS Code section 183 limits the legal deductions that can be taken for a hobby.
Guidelines to determine if business or hobby
Do you depend on income?
Have you made efficiency changes?
Have you earned profits in 3 of last 5 years?
If activities not made for profit, IRS will disallow deductions
See IRS Publication 535, Business Expenses

4. Election for Husband and Wife Unincorporated Businesses
Unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes.
Extensive tax filing requirements
Qualified Joint Venture (Public Law )
Only members are a husband and a wife filing a joint return – can elect to not be treated as a partnership.
Each spouse must report share of income

5. Qualified Joint Venture
(1) the only members of the joint venture are a husband and wife who file a joint return,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect not to be treated as a partnership.
Spouses make the election on a jointly filed Form 1040

6. Qualified Joint Venture
Both spouses must divide all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture, and
Each spouse filing with the Form 1040 a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)
May also be required to file Schedule SE (Self- Employment Tax)

7. Qualified Joint Venture
Husband and Wife organized as LLC
A business owned and operated by the spouses through a limited liability company does not qualify for the election as a Q.J.V.
An EIN is not required unless the QJV is required to file excise, employment, alcohol, Tobacco, or Firearms returns.
If an EIN is required, the filing spouse should complete a Form SS-4 and request an EIN as a sole proprietor.

8. S Corporations
S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. (avoids double taxation of income)

9. S Corporations
To qualify for S corporation status, the corporation must meet the following requirements:
Be a domestic corporation
Have only allowable shareholders
including individuals, certain trust, and estates and
may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have one class of stock
Not be an ineligible corporation
i.e. certain financial institutions, insurance companies, and domestic international sales corporations

10. S Corporations
S corporations file their Federal income taxes using form 1020S.
must also prepare Schedule K-1 as required.
K-1 identifies each shareholders share of current year’s income
Shareholders must also file a Schedule E, Part II, Income or Loss
If they have employees
S corporations must also file a Form 941, Employer’s Quarterly Federal Tax Return and Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

11. S Corporations
In order to become an S corporation, the corporation must submit Form Election by a Small Business Corporation (PDF) signed by all the shareholders.
The instructions for Form 2553 specify all the required information as well as where to file the form.

12. C Corporations
Corporations must file Form whether or not they have taxable income or are in bankruptcy proceedings.
The returns must be signed and dated by any of the following corporate officers; President, vice president, treasurer, assistant treasurer, chief accounting officer, or any other corporate officer authorized to sign.

13. C Corporations
Corporations must pay any tax due by the 15th day of the third month after the end of the tax year. In addition, corporations must use electronic funds transfers (EFT) to make all federal tax deposits.
These deposits are made using the Electronic Federal Tax Payment System (EFTPS). Deposits must be initiated by 8 PM eastern time on the day before the deposit is due

14. Partnerships
IRS publication 541 Partnerships, provides supplemental federal income tax information for partnerships and partners.
File Form 1065, U. S. Return of Partnership Income
Must also file Schedule K-1 (Form 1065)
Taxes are paid on flow through of profits to the partners who in turn attach the K-1 to their individual Form 1040 US Individual Income Tax Return

15. IRS Publications of Interest to Partnerships
334: Tax Guide for Small Business
505: Tax Withholding and Estimated tax
535: Business Expenses
537: Installment Sales
538: Accounting Periods and Methods
544: sales and Other Dispositions of Assets
551: Basis of Assets
925: Passivity and At-Risk Rules
946: How to depreciate Property

16. Family Partnership
Members of a family can be partners. IRS Publication 541 (December 2013) states that family members (or any other person) will be recognized as partners if at least one of the following requirements is met
“If capital is an income producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually owned the partnership interest, and actually control the interest.”
“…Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. For example: If the business requires significant inventories or investments in plant, machinery, or equipment.”

17. Family Partnership
“If capital is not the material income-producing factor, they joined together in good faith to conduct a business. They agreed that the contributions of each entitles them to a share in the profits, and some capital for service has been or is provided by each partner.”
“…Capital is not material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership.” (Pages 2, 3, Pub. 541)

18. Limited Liability Companies (LLC)
The IRS defines a limited liability company “…as a business entity organized in the United States under state law. (Page 2, Pub. 3402, dated March 26, 2010).
“…an LLC may be classified for federal income tax purposes as a partnership, corporation, or any entity disregarded as separate from its owner by applying the rules and regulations section –3.”

19. Limited Liability Companies (LLC)
The default treatment is as a partnership
“…An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes).
An LLC with at least 2 members and classified as a partnership must file form Only a member or manager of an LLC can sign the partnership tax return.

20. Limited Liability Companies (LLC)
If an LLC elects to be classified as a corporation, even if it has just one member, it must file a Form 8832, Entity Classification Election. The LLC may decide to be taxed as an S corporation.
Subsequent elections possible
Partnership to Corporation:
treated as if the partnership contributed all of its assets and liabilities of the corporation in exchange for stock in the partnership and then immediately liquidated by distributing the stock to its partners.

21. Limited Liability Companies (LLC)
Corporation to Partnership
treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all the distributed assets and liabilities the new partnership
Corporation to disregarded entity
treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation
Disregarded entity to corporation
treated as if the disregarded entity contributed all its assets and liabilities of the corporation in exchange for stock.

22. IRS help and resources IRS: http://www.irs.gov/Help-&-Resources
SBA: structure/starting-managing- business/starting-business/establishing- business/taxes

23. Homework Questions
How does the IRS generally classify an unincorporated business jointly owned by a married couple for federal tax purposes?
What type of tax return will a husband and wife who jointly operate an unincorporated business?
What is the difference between an IRS Form 1120S and Form 1120?
Which tax forms are partnerships required to file?
Business or Hobby? How does the IRS decide which is applicable?
What are the two main requirements for a family partnership?